Who gains and who loses from MF expense ratio reduction?

Finally it’s here!

SEBI has introduced new expense ratio slabs with a sole aim of passing on the benefit of economies of scale to the end investor. 

Below is a quick analysis of top 30 funds by AUM showing the impact of new expense ratio slabs. Expense ratios considered are base TER as on 18th Sep 2018. Other expenses that are allowed in lieu of exit loads and on B30 distribution shall be over and above the base TER. 

Fund	AUM in Rs. Cr. as on Aug’18	Base TER Regular in %	Base TER Direct in %	New Base TER (Max)in %	Reduction in Regular Plan Base TER in %
HDFC Balanced Advantage Fund	39,215	1.76	0.76	1.40	0.36
ICICI Pru BAF	29,156	1.75	0.8	1.46	0.29
ICICI Pru Equity & Debt Fund	29,032	1.75	0.85	1.46	0.29
SBI Equity Hybrid Fund	28,105	1.76	1.2	1.46	0.30
HDFC Hybrid Equity Fund	23,137	1.76	0.76	1.50	0.26
HDFC Equity Fund	22,798	1.76	0.91	1.50	0.26
HDFC Mid-Cap Opportunities	21,952	1.76	0.86	1.50	0.26
Kotak Standard Multicap Fund	21,927	1.76	1	1.50	0.26
Aditya Birla SL Frontline Equity	21,880	1.76	1.06	1.50	0.26
SBI BlueChip Fund	20,701	1.76	1.1	1.51	0.25
ICICI Pru Bluechip Fund	19,836	1.76	0.91	1.52	0.24
Axis Long Term Equity Fund	18,752	1.76	1.07	1.53	0.23
ICICI Pru Value Discovery Fund	17,329	1.76	0.99	1.54	0.22
HDFC Top 100 Fund	15,874	1.77	1.07	1.55	0.22
Aditya Birla SL Equity Hybrid ’95	15,001	1.77	0.92	1.56	0.21
Reliance Equity Hybrid Fund	14,481	1.77	0.87	1.56	0.21
Motilal Oswal Multicap 35 Fund	14,052	1.79	1.11	1.56	0.23
Franklin India Equity Fund	12,330	1.77	0.96	1.58	0.19
Reliance Large Cap Fund	11,601	1.77	1.04	1.59	0.18
ICICI Pru Multi-Asset Fund	11,385	1.77	0.95	1.59	0.18
L&T Hybrid Equity Fund	10,971	1.78	0.98	1.60	0.18
Reliance Tax Saver (ELSS) Fund	10,546	1.77	1.15	1.60	0.17
Aditya Birla SL Equity Fund	10,307	1.78	0.98	1.61	0.17
Reliance Multi Cap Fund	10,269	1.78	1.23	1.61	0.17
Mirae Asset India Equity Fund	9,049	1.78	1.09	1.62	0.16
Franklin India Bluechip Fund	8,401	1.79	1.05	1.63	0.16
HDFC Equity Savings Fund	7,513	1.79	0.29	1.65	0.14
HDFC TaxSaver	7,268	1.79	1.24	1.65	0.14

(This are just approximate numbers and actual expense ratios may be differ)

The impact will be material in funds with larger AUM and negligible in funds with less than Rs. 2000 crore AUM.  

Approximate reduction in base TER: 

Fund Size	Approximate Reduction in TER
upto 2,000 cr.	less than 1 bps
2,000 cr. to 5,000 cr.	1 to 10 bps
5,000 cr. to 10,000 cr.	10 to 18 bps
10,000 cr to 25,000 cr.	18 to 28 bps
25,000 cr to 35,000 cr.	29 to 35 bps
above 35,000 cr.	more than 35 bps

How does it impact investors?

Investors in regular plan will get maximum benefit as regular plans of large sized funds will see sharp reduction in expense ratios. Same may not be true for direct investors though. Looking at the above data on existing TER one can notice that the current expense ratios in regular plans are consistent with size however, when it comes to direct plans the current expense ratios have no correlation with size. Some larger size funds are charging higher expense ratio than what a relatively small size fund is charging. This shows that expense ratio in direct is not a function of size but solely depends on what the AMC wants to charge. Fungibility within the different expense heads is a loop hole which, if removed, will bring in consistency and pass on benefit to direct investors as well.

Moreover, AMCs will take a hit on regular plans as they may not be able to pass entire expense reduction to distributors and hence, there is less probability of AMCs taking another hit on direct plans as well, at least in larger sized funds. So, cheer for investors in regular plans, not in direct plans.

How does it impact the AMCs?

Needless to say that revenues will be hit in existing larger funds that have become brands for these AMCs. The focus now shall shift towards promoting smaller sized funds and some AMCs may also launch more funds (in missing categories) to grab share using higher payout as a pull factor. 

RIP closed-ended funds! AMCs who have been continuously launching close ended funds to gather assets by paying higher brokerages and upfront will see the end of the sea. Good for investors, they won’t be dumped anymore. 

How does this impact the Industry?

Welcome reform for the industry as a whole – not disruptive and will slowly improve quality of distribution. Distributor income will take a hit, but will have see how much AMCs share it and take hit on their own balance sheets. All trail model is welcome step and many serious players today prefer this mode over upfront. However, AMCs should follow this in the right spirit else, one bad fish will spoil the entire pond. The pace of new distributors coming into MF business will push slower as many newbies will prefer selling insurance or other products that can give them early cash-flows. 

Gap between the expense ratio of direct and regular plan may shrink which will put distributors in relatively better shape. Direct plan portals will have to change their pitch of just saving cost to something more. Allowing B-30 only for retail investors is a sensible move and will promote real penetration of MF into smaller towns. 

In nut shell.. it is a progressive reform and will go a long way. 

 

New slabs for Equity oriented open ended schemes as per the SEBI circular:

AUM Range		Base TER
0	500	2.25%
501	750	2.00%
751	2000	1.75%
2001	5000	1.60%
5001	10000	1.50%
10001	15000	1.45%
15001	20000	1.40%
20001	25000	1.35%
25001	30000	1.30%
30001	35000	1.25%
35001	40000	1.20%
40001	45000	1.15%
45001	50000	1.10%
50001	and above	1.05%

 

 

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